THE SITUATION: You are a Research Analyst working for a top portfolio management firm, "UMUC Portfolio Management" (in no way affiliated with the University of Maryland University College). A high-net-worth client has approached your firm with the objective of finding an analyst qualified to manage their large portfolio. Your firm has selected several of its analysts to develop test portfolios in order identify the best person to manage the portfolio of this rich client. You have been selected by your firm to develop a 5-week trial portfolio to present to the client (and class). Because of the importance of this client (and their potentially large investment) your fee for demonstrating superior portfolio selection and management skill will be substantial. The analyst with the best report will become the portfolio manager for this high-net-worth client's portfolio (valued at over $100 million). Your portfolio management report and presentation will be submitted directly to your firm's high-net-worth client with the approval of your firm's Board of Directors. The success of your recommendations will determine the success of your firm in landing this large investor. (It is expected that your portfolio recommendations will not be the same as those reached by other analysts). You should do a market wide financial evaluation to determine the current situation, best investment course, appropriate asset allocation for this important client. 

USE THE P4-INVESTMENT RETURNS ANALYSISSPREADSHEET ASSIGNMENT FOLDER FOR ALL WEEK FOUR DELIVERABLES

STEP ONE: Update securities prices daily. Prepare an Excel Spreadsheet Investment analysis of Investment Returns. Submit the Investment Returns Analysis to the P4-Investment Returns Analysis Assignment Folder.

STEP TWO:You have been given an additional $100,000 to purchase a Portfolio of five (5) Option Contracts at Beginning of Week 4 (Note: Recommend Using CBOE.com for Option Information.)

Please keep in mind that you do not have the luxury of trading or selling and/or buying securities during your portfolio holding period.

After you determine your initial portfolio you must buy the portfolio using the HYPERLINK "http://www.cboe.com/tradtool/virtualtrade.aspx" CBOE Virtual Trade Tool ( HYPERLINK "http://www.cboe.com/tradtool/virtualtrade.aspx" http://www.cboe.com/tradtool/virtualtrade.aspx). The commission costs per trade (using CBOE Virtual Trade) are $9.95/trade for stocks and ETFs and $14.95/trade for options.

The securities you select for your portfolio can be selected from any traded securities that are available on CBOE Virtual Trading. (Exception! you may not invest in mutual funds or the S&P 500 market index)

STEP THREE:The assignment for the fourth week is to make your first option contract purchases using the CBOE Virtual Trade Tool ( HYPERLINK "http://www.cboe.com/tradtool/virtualtrade.aspx" http://www.cboe.com/tradtool/virtualtrade.aspx). What did you purchase and how does it relate to the investment policies and strategies statement you developed for Homework #1? Did you modify the investment policies and strategies? If you changed your investment policies and procedures what exactly did you update? If you revised your investment strategies did you inform the client?

Please submit your Homework #4 Option Investment Policies and Strategies in MS Word format with the following file name: LastNameFirstInitial_Homework04.docx. For example, if you name is John Smith, the file name of your response should be SmithJ_Homework04.docx.

Your option purchase strategy should be 1-2 pages (300-600 words), with at least three references. By the due date, submit Homework #4 to your P4A- Add Investments to Portfolio Assignment Folder.

ADDITIONAL INFORMATION

Video

“How to Calculate Return on Investment”

HYPERLINK "https://www.youtube.com/watch?v=YZhcFlnJJnM" https://www.youtube.com/watch?v=YZhcFlnJJnM

 

Here is the overview of the assignment:
OVERVIEW OF PORTFOLIO: You are to consider all necessary and relevant stock market performance and information, trends, and projections in supporting your strategy. These factors should include, but are not necessarily limited to, stock screens, earnings forecasts, P/E ratios and industry comparisons, technical analysis and trends, capital market relationships, and analysts' reports and ratings. Your report will specifically be concerned with risk and return, sector analysis, cumulative wealth, capital market line, security market line, and performance rankings. In addition, you must consider portfolio weights, commission costs and other factors covered in the course.
You will inform the class of your investment decisions by posting your strategies and initial portfolio in the Week 2 Conference topic "Portfolio Project - Buy your Portfolio". The commission costs per trade (using CBOE Virtual Trade) are $9.95/trade for stocks and ETFs and $14.95/trade for options. The securities you select for your portfolio can be selected from any traded securities that are available on CBOE Virtual Trading.
Note: Investment constraints are (1) you cannot purchase the S & P 500 Index, (2) you cannot purchase bond funds, (3) you cannot purchase mutual funds or bond funds (3) you cannot trade securities during the 5-week holding period and (4) bonds cannot be purchased on CBOE. You will have to simulate your purchase of bonds using Yahoo! Finance or another source and track the purchase on your tracking spreadsheet.
The investment schedule of the portfolio is as follows:
Week 2- Invest $100,000 in Stocks or ETFs
Week 3- Invest $100,000 in Bonds
Week 4- Invest $100,000 in Options
Week 5- Invest $100,000 in Futures
Week 6- Friday by the Closing Bell of the NYSE, Sell the PortfolioIntroduction 

The purpose of the Investment Policy Statement (IPS) is to provide an appropriate set of goals to be attained through the investment of the client’s portfolio’s assets.

 

Return objective

With the intention of meeting its needs, the investment strategy of the portfolio is to emphasize perpetual, high and low-risk return. The objective is to make a return consistent with the return on a diversified portfolio of assets, which consist mainly of the return on portfolios of stocks, bonds, and cash, consistent with the asset allocation targets.

 

Investment theory

In order to adhere to diversification as a financial practice that significantly reduces the risk faced by the portfolio, several investments must be involved in the portfolio. The portfolios selected are financial income securities issued by the government, real estate, hedge fund and the stock exchange. 

 

The allocations in percentage to the various assets in the portfolio are as below:

 

 

Type of Asset Sub-branch Percentage   

Government issued income Securities US Government Bonds

US Government T-bills 20%

15 %   

Hedge funds Market Neutral Hedge Funds

Macro Funds 10%

10%   

Real estate

Real Estate Investment Trust

Real Estate Trading 10%

20%   

Stocks Established Corporate

Incoming Promising Corporate 5%

10%  

 

Investment Constraints

Government issued income securities take the highest percentage 35% due to their low-risk and high returns. The returns will be in terms of coupons paid from the long-term bonds. Higher returns will be realized from the redemption of the T-bills and long term bonds.

 

Market neutral and macro hedge funds also share the 20% allocated for the hedge funds. They are selected because returns are cushioned from the market movements. It is at the discretion of the portfolio manager in consultation with the Board of Directors to decide on whether to take on short term or long term funds.

 

A fair share of 20% will be seized by real estate trading; the portfolio managers will have a mandatory coordination of research, purchase of land, and construction of estates for sale. All actions must be authorized by the Board of Directors. A 10% will go to Real Investment Trust as a result of the high returns registered, and therefore, high returns in terms of dividends.

 

The portfolio manager, in consultation with the Board of Directors, will select young and promising corporate and invest with the main of holding and offering for sell when prices are high. The volatility involved will be reduced by the percentage that will be invested in the stocks of corporate that are more stable but with the potential to gain value. Returns in terms of dividends and sales are made upon increase of shares prices.

 

Risk Mitigation

Diversification – the portfolio is shared among various assets to reduce the risk involved.

 

The portfolio manager’s action in terms of purchase of securities and allocation of funds to various assets closely regulated by the Board of Directors to ensure viability of investments made.

 

Exhaustive research in the market must be employed to ensure validity of investment options taken.

 

Taxes 

The portfolio is organized such that it takes care of the amount of cost on tax that is incurred. Assets that receive preferential tax treatment, such as dividends, offset the full tax incurred on the government bonds. This organization of the portfolio greatly reduces the amount of tax cost incurred by the portfolio.



References

Fixed income securities, California institute of Technology retrieved at www.hss.caltech.edu/~jlr/courses/.../JWCh03.pdf 

Hedge funds, US Security Exchange Retrieved at https://www.sec.gov/.../ib_hedgefunds.pdf

Mahipal Singh (2011), Security Analysis with Investment and Portfolio Management, p.130